Some people refer to special purpose acquisition companies (SPACs) as shell companies. These organizations exist to help raise money to buy and company. They may also facilitate the initial public offering (IPO) of a business that intends to become a publicly-traded entity.
There have long been regulations that govern the use of SPACs for financial purposes, and those rules have recently shifted. The Securities and Exchange Commission (SEC) announced several adjustments to the regulations that apply to SPACs in January 2024. Adherence to those new standards is crucial for those involved in the IPO, acquisition or fundraising process. The following are some of the key regulations that have changed.
New rules for forward-looking statements
There are very strict rules about forward-looking statements in the document provided by organizations preparing for a traditional IPO. There is a fine line between economic and policy analysis and fraudulent misrepresentation of the prospects of a potential investment. The SEC recently altered the rules that apply to forward-looking statements made by SPACs. While special safe harbor rules used to apply to SPACs, that is no longer true. Any forward-looking statements made by SPACs are now subject to the same rules and scrutiny applied to traditional IPOs.
Target companies are now co-registrants
An SPAC may select companies for acquisition, which many refer to as target companies. Disclosures about the executive officers and the board of directors at the target company are now necessary inclusions in registration statements when planning de-SPAC transactions. Should investors initiate litigation in the future, the responsible parties at the target company could have a degree of liability for omissions and fraudulent misrepresentation.
Other expanded disclosure requirements
SPACs must now make numerous disclosures related to sponsors, their affiliates and any promoters. Information about compensation and even details about the securities issued during transactions must now be made available. Disclosures about conflicts of interest within the SPAC and the target company are also mandatory. Even the possibility of future dilution requires disclosure.
Those starting an SPAC, planning a non-SPAC transaction or operating a target company may need to learn more about the changing regulations that could affect their upcoming IPO. Tracking the evolution of SPAC statutes and securities law can benefit those involved in major business transactions, like acquisitions.